Insolvency Advice

Insolvency

A company is only deemed to be insolvent if it cannot afford to pay what is owed to its creditors; evidence of which can be provided via two different tests. The cash-flow forecast test will ascertain whether or not a business will fail to pay its debts as they are due. The balance sheet test will determine whether or not the monetary value of a company’s assets amounts to lower than the total value of its liabilities.

If the response to any of these questions is ‘yes’ then a company may be considered insolvent under UK law. In addition to this, a company is also deemed insolvent if a creditor serves a formal payment demand that is ignored for longer than three weeks (the amount owed must be over £750) or if a court order has not yet been fulfilled.

What are the Repercussions of Insolvency?

The consequences facing an insolvent business will largely depend on the facts of any given case, but any of the following repercussions may apply:

Personal consequences and disqualification

Directors must place the interests of creditors first. Continuing to trade beyond the time where insolvency becomes unavoidable may result in serious professional and personal consequences.

Winding-up petition

this may be served against a company by a creditor who has issued a statutory payment demand that has gone unheeded. This can result in a company being placed into compulsory liquidation.

Disposal of assets voided

This will occur once a wind-up petition has been put forward. A company must first obtain permission from the court before selling any goods or making any payments for supplies in these circumstances.

Default banking facilities

The introduction a formal insolvency process will be recognised as a default under any banking facilities held by the business. This will enable a lender to impose any security it holds.

Transactions may be reversed

Any transactions made up to two years prior to the initiation of an insolvency process began can be reviewed by the appointed insolvency practitioner. This person may then decide to reverse a transaction based on whether or not a company was insolvent at the time the transaction took place.